Financial Accounting Framework

Question 1

What does GAAP stand for?

Answer 1

Generally Accepted Accounting Principles

Question 2

What is GAAP?

Answer 2

Rules that guide managers and accountants in preparing and issuing financial statements for external users.

Question 3

Why is the flexibility of GAAP important?

Answer 3

Because it allows for different accounting treatment of certain transactions. This may produce different financial statements results.

Question 4

What does IFRS stand for?

Answer 4

International Financial Reporting Standards

Question 5

What is IFRS?

Answer 5

It is a set of principle based accounting reporting standards intended to be applied world wide so financial information follow a common, global accounting language.

Question 6

What organization started the movement to standardize accounting rules world wide?

Answer 6

International Accounting Standards Committee (IASC)

Question 7

Who currently oversees the initiative of working with countries to move their standards to IFRS?

Answer 7

The International Accounting Standards Board (IASB) formed from the IASC in 2001.

Question 8

What accounting method is prescribed by US GAAP?

Answer 8

Accrual Accounting

Question 9

What is accrual accounting?

Answer 9

This is the accounting method that matches revenue and expenses, regardless of the receipt or disbursement of cash.

Question 10

Who are external users?

Answer 10

investors, lenders, and other parties that use financial statements to make relevant, efficient, and sound decisions about a company.

Question 11

What are external users five demands of financial statements?

Answer 11

Financial Statements must:
1. Represent the business activities fairly and accurately
2. Be consistent from period to period
3. Be consistent for transactions that are essentially the same
4. Be transparent or understandable as presented or in conjunction with notes and related schedules
5. Provide full disclosure

Question 12

Beside accrual, what are other ways financial statement may be presented under GAAP?

Answer 12

• Income Tax basis (seen when accountants use IRS regulations that match directly with the business tax return)
• Modified Cash Basis
• Regulatory Basis

Question 13

When are GAAP Statements required and not required?

Answer 13

• Required for public companies and regulated industries
• Not required for private companies

Question 14

What are 2 reason why a company may be considered a publicly traded company?

Answer 14

1. Has securities registered with the security and Exchange Commission
2. Holds assets in a fiduciary capacity for a bred group of outsiders as one of its primary businesses

Question 15

What type of entities are excluded from the public company definition?

Answer 15

Government or other public sector entities and non-profit organizations.

Question 16

What is the main difference between a private company and a public company?

Answer 16

Private companies are businesses owned by a relatively small number of single shareholder and does not offer or trade shares to the general public.

Question 17

Under what specific circumstances must private companies present GAAP financial statements?

Answer 17

If a CPA is engaged to audit the company

Question 18

What are five industries that require the use of GAAP financials and may have additional rules?

Answer 18

• Banks
• Insurance Companies
• Non - Profits
• Government Agencies
• Pension Plans

Question 19

Why do financial statements provided to external users need to have useful information and be easy to understand?

Answer 19

So external users can:
- Make informed decisions, such as whether to invest in or lend to the company
- Project cash flows of future performance

Question 20

What are the 2 underlying assumptions, in order to consider GAAP statements useful?

Answer 20

• Accrual accounting: expenses are recognized in the period they occur; revenues are recognized when they are earned.
• Going concern: the presentation of financial statements assumes that the business is going to continue indefinitely into the future.

Question 21

Why is the going concern important to the analysis of a companies financials?

Answer 21

It means that the values presented are not liquidation values but instead what the value would be in an orderly sale in the open market.

Question 22

What publication is one source that accountants use as reference to determine the application of accounting principles?

Answer 22

The AICPA Professional Standards Publication

Question 23

what are the 5 qualitative characteristics that make financial statements useful?

Answer 23

• Relevant
• Reliant
• Comparable
• Understandable
• Free from Constrains